Posts loss for FY16, affirms FY17 KOMs

Marlborough Wine Estates 5 September 2016 Update

Marlborough Wine Estates

Posts loss for FY16, affirms FY17 KOMs

Food & beverage

NXT Company Spotlight

 

5 September 2016

Price

NZ$0.37

Market cap

NZ$109m

Share price graph

Share details

Code

MWE

Listing

NXT

Shares in issue

293.3

Business description

Marlborough Wine Estates Limited (MWE) owns and operates six vineyard blocks located in the Awatere Valley in the Marlborough wine district of the South Island of New Zealand. MWE sells bottled wine to China, NZ and other markets as well as bulk wine and grapes to wine producers in NZ.

Bull

Marlborough white wines, particularly sauvignon blanc, have a global reputation for quality.

Option to improve earnings by converting more of the grape harvest into bottled wine for local and export sales.

Improvements in vineyard management, particularly in securing water supply, could improve grape yields.

Bear

Maintenance of premium pricing is dependent on quality of the product.

Majority distribution in Asia being made by related parties, albeit that the related party is purchasing bottled wine at a premium of 30% to the average NZ export price for white wine.

Greater demand for MWE’s products may depend on conversion of Asian markets from red wines to premium white wines.

Analysts

Moira Daw

+61 (0)2 9258 1161

Finola Burke

+61 (0)2 9258 1161

Marlborough Wine Estates (MWE) has reported a NZ$0.9m statutory net loss for FY16 on revenue of NZ$7.4m. The company has affirmed its FY17 key operating milestones for harvest, wine tonnages and international and New Zealand bottled wine sales. MWE, which was formed in March 2015 to acquire vineyard assets comprising the Otuwhero Estate from Min (James) Jia, is targeting the development of a premium New Zealand white wine brand in China. It is also looking further afield to the US, Japan and Korea for its wine and non-wine related products.

FY16 results

MWE has released its audited accounts for FY16, revealing a statutory net loss of NZ$0.9m, compared with NPAT of NZ$0.6m for the three months to June in FY15. The net loss, adjusted for one-off listing costs of NZ$0.4m, was NZ$0.5m. Revenue increased threefold to NZ$7.4m versus NZ$1.8m in FY15 (three-month trading period) and gross profit for the year was NZ$0.7m. The company reported positive operating cash flow of NZ$1.0m and net debt reduced by 9% to NZ$4.6m for the period.

Key operating milestones for FY17 affirmed

MWE affirmed the FY17 KOMs set out in its 30 June 2016 listing document. The company is targeting a gross harvest of 1,544 tonnes and bulk grape sales of 1,144 tonnes. It is anticipating that bottled wines sales, which in FY16 made up 24% of its revenues, will be NZ$3.4m, with NZ$3.2m to come from international sales and the remainder from domestic bottled wine sales. MWE has noted that in FY17 it expects bulk wine sales to decrease as more of its wine production will be needed to meet anticipated export demand for its bottled wine. The company’s strategy is to continue to position its O:TU brand wine at the premium end of the market, increase the sales of bottled wine through increased market penetration in China and Hong Kong and expand into new markets. Growth is also expected from acquisitions and by expanding into other NZ-sourced food and beverage products.

Valuation: Price up 80% since listing

MWE has not provided any forecast material other than the KOMs. Since listing on NXT, MWE’s share price has climbed 80% from the last issue price of NZ$0.20 to NZ$0.37 currently. The company’s two closest peers, Australian Vintage (AVG.AX) and Delegat Group (DGL.NZ), are trading on EV/Revenue multiples of 0.5x and 3.5x respectively, compared with MWE’s FY16 EV/Revenue multiple of 15x.

Historical performance

Year end

Revenue (NZ$000)

NPAT*** (NZ$000)

EPS (c)

DPS (c)

P/E (x)

Yield (%)

06/15 PF*

2,788

170

0.1

0.0

N/A

N/A

06/15**

1,840

590

0.2

0.0

N/A

N/A

06/16

7,424

(494)

(0.2)

0.0

N/A

N/A

Source: Marlborough Wine Estates. Note: *Pro forma for 12 months; revenue includes sales revenue and other revenue. **Actual from 18 March 2015 to 30 June 2015. ***NPAT includes positive fair value adjustment of NZ$1.054m, according to management, and FY16 excludes one-off capital raising costs.

FY16 results and key operating milestones

Marlborough Wine Estates (MWE) reported a net loss of NZ$0.5m for FY16 after adjusting for capital raising costs of NZ$0.4m. The company delivered sales of NZ$7.4m. Its gross profit margin of 10% for FY16 was below the 14% gross profit margin achieved in the three months to 30 June, 2015. The company noted that the main cause of this reduction was that a large amount of inventory was sold at cost and that the effect of this inventory sale was temporary. MWE expects gross profit margin to improve as this old inventory is sold off.

Operating expenses in the business were NZ$1.2m after excluding capital raising costs, with salaries and wages accounting for one-third of operating expenses. Exhibit 1 sets out the company’s reported results.

Exhibit 1: FY16 versus FY15

NZ$m

FY16

FY15 (three months trading period)

Sales

7.4

1.8

Cost of sales

6.7

1.6

Gross profit

0.7

0.3

Gross profit margin

10.0%

14.1%

Statutory EBITDA

0.5

1.0

Adjusted EBITDA (ex-capital raising costs)

0.9

1.0

EBIT

(0.1)

0.9

NPBT adjusted

(0.5)

0.8

NPAT adjusted

(0.5)

0.6

EPS adjusted (NZc)

(0.2)

0.2

Source: Marlborough Wine Estates

Key operating milestones

The key operating milestones (KOMs) are required under the NXT listing rules to be reported on a quarterly basis. This requirement is to allow investors and potential investors to track the performance of the company and to gain some insights into the key growth and profit drivers of the business.

MWE has set four key metrics by which investors should be able to assess performance:

Gross harvest, or grape production from the vineyards. This measure shows the vineyard’s grape supply capacity, which in the opinion of the board is sustainable for at least 15 years. Grape production is expected to increase as the vines mature and the board’s longer-term forecasts are for a gross annual harvest of 2,000 tonnes (5% annual growth rate). At a 5% growth rate of annual production, the FY16 production of 1,653 tonnes should reach 2,000 in 2023. The KOM forecasts are for grapes produced from the existing vineyards and do not factor in future vineyard development where the time to full production could take five years. The FY16 harvest yielded 1,653 tonnes due to extremely favourable climatic conditions. The FY17 forecast of 1,544 tonnes assumes normal growing conditions and is therefore 5% pa growth from the FY15 production baseline. FY16 was considered to be an exceptional year.

Bulk grape sales have been expressed in tonnes because of the difficulty in forecasting the price, which can vary materially depending on supply/demand factors. Bulk grape sales as a percentage of the total harvest is expected to increase from 71.8% in FY16 to 74% in FY17. The tonnage of bulk grape sales is governed by how much of the harvest is put into bottled and bulk wines. It is MWE’s intention to increase bottled wine sales because they offer higher margins than grapes sold in bulk or grapes processed into bulk wine. An increase in the sale of bottled wines will mean a reduction in the amount of wine sold as bulk wine to other NZ wine producers.

International bottled wine sales, which management expects to double from NZ$1.6m in FY16 to NZ$3.2m in FY17, are underpinned by the minimum purchase requirements that form part of the distribution arrangements with related party HK-based distributor Great Esprit Limited (GEL). In FY16, GEL was contracted to undertake minimum purchases of NZ$1.4m of bottled wine out of total international sales of NZ$1.6m. This minimum guarantee rises to NZ$3.0m of total international sales of NZ$3.2m in FY17. The minimum purchase requirements mean it would be very unlikely for the international wine sales KOM not to be met.

NZ bottled wine sales are expected to be driven by the Music Bay brand, launched in 2016. The Music Bay brand has been developed as a brand that is likely to have appeal in the local NZ market. (The O:TU brand is used for the premium wines produced by MWE.) NZ wine sales accounted for 8.6% of total bottled wine sales in FY16 and are expected to account of 6% of total bottled wine sales in FY17.

Exhibit 2: Key operating milestones defined by company

FY15 (pro forma)

FY16 actual

FY17 target

Gross harvest (tonnes)

1,401

1,653

1,544

Bulk grape sales (tonnes)

955

1,187

1,144

International bottled wine sales (NZ$)

679,806

1,604,500

3,200,000

NZ bottled wine sales (NZ$)

104,407

150,400

205,940

Source: MWE

Peer comparison

To provide a valuation reference for MWE we have looked at how the market is pricing comparable companies. There are two listed peers in the NZ/Australian market. Both companies are well established and are substantially larger than MWE and are therefore of limited relevance. They are trading on an average EV/Revenue multiple of 2.0x, substantially lower than the 15x FY16 EV/Revenue multiple that MWE is currently trading on, given its earlier stage in its life cycle.

Exhibit 3: Comparable company analysis

Company

Currency

Market cap (m)

2016e P/E (x)

2017e P/E (x)

2018e P/E (x)

2016e EV/EBIT (x)

2017e EV/EBIT (x)

2018e EV/EBIT (x)

2016e EV/Revenue (x)

2017e EV/Revenue (x)

2018e EV/Revenue (x)

Australian Vintage

A$

125

N/A

16.4

11.0

7.7

7.6

5.6

0.5

0.5

0.5

Delegat Group

NZ$

616

16.6

16.2

13.5

14.6

13.3

11.5

3.5

3.6

3.3

Average

 

16.6

16.3

12.3

11.2

10.5

8.6

2.0

2.0

1.9

Source: Bloomberg. Note: Prices at 1 September 2016. All companies have a 30 June year end.

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